The wheels of Justice may turn slowly, but the CFTC never sleeps

Chris Lee

When the Great Recession hit in 2008, financial markets went into tailspins that wreaked havoc on portfolios across the globe. Many fund managers were sent packing far and wide, but those that were living high on the hog from misappropriated client deposits were suddenly exposed when withdrawal requests inundated their domains. Arrests and prosecutions are still being publicized from that tsunami of sorts that washed away the false cloak of outrageous returns that had once been promised. Although several years have passed, the CFTC continues to ferret out the crooks.

In November of each year, the agency publishes their annual report for the fiscal year that summarizes its success. According to the latest report, “The CFTC obtained a record $3.27 billion in monetary sanctions imposed against companies and individuals. The CFTC filed 67 new enforcement actions while continuing to devote significant resources to litigating a host of complex cases filed in prior years… This brings the Commission’s total monetary sanctions over the past two fiscal years to more than $5 billion, which is more than the total sanctions imposed during the prior 10 fiscal years combined.”

If you do the math, last year’s amount represents a more than 50% increase over the prior year. If ever there were a technical indicator for the prosecution of “Crime-dom”, then it would show that fraud has not peaked or shown any signs of an imminent reversal. The preponderance of the cases stem from market manipulation in interest rate and commodity futures markets, unscrupulous fund management activities, and a host of fraud related schemes. Forex crime seems to be less than others in perspective. Perhaps, the criminals have been testing out other greener pastures, so to speak.

In many instances, a few major banks were slapped on the wrist with punitive fines for poor supervision and reporting violations, but there were two notable cases that have been moving through the justice system since 2010 and before. The largest item in the highlights involved a $7.6 billion in inappropriately solicited funds by Stephen Walsh and his co-conspirators to run an S&P 500 index arbitrage scheme. $51 million was siphoned off and is missing. The other large case involved the ongoing efforts to recover $1.2 billion in losses incurred by clients of MF Global, when that firm failed in 2011.

Forex fraud prosecutions did not reach these gargantuan heights in dollar values, but here are a few of the highlighted stories in our sector of the market:

  • Lyndon Parrilla, of California, was sentenced to 97 months in prison for his fraudulent forex trading activities perpetrated through his firm, Green Tree Capital. The Order required “Parrilla to pay restitution of $4,197,342 to defrauded customers, disgorgement of $3,353,925, and a $10 million civil monetary penalty.” As is usually the case in schemes like this one, the crook promised consistently high returns from leveraged forex trading, faked monthly reports to back up his claims, and then used millions of his clients’ monies to live the high life at Las Vegas casinos and elsewhere. The games began in 2009, but the long arm of the law finally got their man.
  • In another forex fund case, the CFTC obtained a Judgment Order against Senen Pousa and Investment Intelligence Corporation (IIC) (d/b/a ProphetMax Managed FX) for defrauding 960 clients, both in the United States and abroad, of over $32 million, beginning in January of 2012. The judge also assessed a $79.5 million civil monetary penalty to drive home the point. In this instance, Pousa and his agents “utilized “wealth creation” webcasts, webinars, podcasts, emails, and other online seminars via the Internet to directly and indirectly fraudulently solicit actual and prospective clients worldwide to open forex trading accounts at IIC.” Always be careful when you are approached by slick marketing pitches that sound too good to be true.
  • There are several similar cases of a smaller nature where the criminal penalties pertain to crooked fund managers that solicit funds from the unwary by promising high returns from trading foreign exchange. In most cases, the funds are never traded, but used for lavish living expenses of the fund managers. Fictitious client reports follow, along with refusals to honor withdrawal requests. Does this sound like a repeating theme?

Forex traders are always taught to recognize patterns in the market and then to leverage the predictable conclusion of those patterns to their own benefit. It is not difficult to discern the obvious pattern behind these fraudulent schemes. Our low-interest-rate environment has forced many investors to seek better returns in market sectors that appear to offer more, but these same investors forget that increased risk also accompanies such claims. Yes, there is an abundance of valid and successful fund managers in the marketplace, but investor greed continually invites the criminal element of our society to enter the scene and ply their wares.

The CFTC will fight for you, if you are defrauded, but it does take a long time and the recovery of losses is never a certainty. Always be skeptical, and remember that being forewarned is being forearmed.


Chris Lee

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